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Why will China recover more slowly from the latest Covid shock?

As Shanghai tries to reopen businesses, a downtown district over the weekend banned residents from leaving their apartment complexes again for mass virus testing. Pictured is a line outside a shopping mall in another neighborhood on May 21, 2022.

Xu Kaikia | Visual China Group | Getty Pictures

BEIJING — Many economists predict that the Chinese economy will not be able to recover quickly from the latest Covid outbreak.

Instead, they expect a slow recovery ahead.

When the pandemic hit for the first time in 2020, China rebounded from its first-quarter contraction to grow in the second quarter. This year, the country faces a much more contagious strain of the virus, weaker growth overall, and less government incentives.

The latest Covid epidemic, which started in March, hit the Shanghai metropolis the hardest. About a week ago, the city announced plans to come out of quarantine and fully reopen by mid-June.

“The main story here for China is that we’ve seen the light at the end of the tunnel. The worst supply chain dislocations in China from the Covid lockdown seem to be over,” Robin Xing, chief economist at Morgan Stanley for China, said during a webinar on Friday.

“However, we think the recovery path will likely be slow and bumpy,” Xing said. Said.

it’s a process fits and starts. Weekend, a downtown Shanghai area once again prohibited residents from leaving their apartment complexes to conduct mass virus testing. More parts of the capital Beijing have ordered people to work from home as the number of local daily cases rises – reaching 83 on Sunday, the highest for the city’s latest outbreak.

Case study: German automaker Volkswagen, The company, which has factories in two of the hardest-hit areas this year, said on Wednesday that its manufacturing facilities in China are operational, but Covid controls are disrupting their supply chains.

The automaker said it was unable to provide specific figures on production levels as the factories are joint ventures operated with local partners.

While the national number of Covid cases fell last month, pockets of new cases stretching from Beijing to southwestern China have led to stay-at-home orders and mass testing. Load volumes remain below normal.

“Many regions and cities tightened restrictions at the first sign of local cases,” said Meng Lei, UBS Securities China equity strategist in a note last week. Said.

“Our case studies in Shanghai, Jilin, Xi’an and Beijing show that logistics and supply chain disruptions are the biggest issues affecting production resumption,” Meng said. said. “Therefore, resumption of work is likely to be gradual rather than overnight.”

Policy making cycle ‘cut’

The Chinese government has adhered to its strict “dynamic zero-Covid” policy, despite the emergence of the highly contagious omicron variant this year.

Dan Wang, Shanghai-based chief economist at Hang Seng Bank China, said the “most significant impact” of the Covid resurgence was that it “cut” the normal policy-making program.

He said the latest wave of cases and the curfew really only started after the central government announced its decision. Annual economic plan at the “Two Sessions” council meeting in March.

In China’s heavily managed economy, this annual meeting is a critical part of the cycle of national policy development and implementation across departments and regions.

Supply chain disruption and sluggish consumption are manageable, but once the policy program is disrupted, “it’s hard to get it back on its original path quickly,” Wang said.

There are so many different economic goals that “many compromises between different countries have to be made. [government] “This has made the policy process extremely slow and delayed.”

The China State Council information office, the country’s top executive body, did not immediately respond to CNBC’s request for comment.

The policy carries particular weight with officials this year, ahead of a regular change of leadership scheduled for the fall. Chinese President Xi Jinping is expected to remain in office for an unprecedented third term.

Half of the incentive in 2020

At the “Two Sessions” in early March, Beijing set targets of “approximately 5.5%”, such as GDP growth. However, this is about 1 percent or more above many people’s estimates. Investment banks that repeatedly lowered their Chinese growth forecasts While the Covid lockdowns continue.

Wang puts a relatively high estimate of 5.1% as he expects China to increase stimulus and ease tighter Covid controls in late summer.

But so far, nearly two months after Shanghai’s severe lockdown, policymakers have yet to make any major changes.

In terms of interest rates or fiscal policy, the level of government stimulus is still about half of what it was at the peak of the pandemic in 2020, Xing of Morgan Stanley said.

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With the exception of unemployment, most economic indicators did not reach levels worse than in early 2020.

Among other measures, the central government announced tax and duty cuts for small businesses and began lowering mortgage rates. However, it may take time for the impact to emerge, especially on the huge real estate sector.

Xing noted that even without Covid, it would take three to six months for the loosening of policy in the real estate market to affect home buying activity.

Humming throughout other parts of China

Still, it’s also possible that growth in China is coming faster than many expected.

“Silver lining, experience over the past two years shows that a Covid-induced recession tends to end quickly, particularly with swift and strong policy responses,” Larry Hu, Macquarie’s chief economist for China, wrote in a note last week. Said.

For most of China, work is ongoing, even as there are additional virus testing requirements.

About 80% of production in southern China has returned to normal. Trucking of goods within a province is “OK”, although the region’s major city, Shenzhen, closed nearly all businesses for nearly a week in March. Klaus Zenkel, head of the southern China division of the EU Chamber of Commerce in China, told CNBC on Friday due to the very low number of Covid cases in the region.

Members in southern Guangdong province, a manufacturing hub, “are all busy, they all have work to do,” said Zenkel. He noted that businesses keep their warehouses fuller than before to avoid a long-term shortage problem.

But “there’s unpredictability,” he said. “You don’t know what will happen.”

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